Blockchain technology is poised to transform the financial sector by increasing efficiency, transparency and security; reducing costs; and unleashing an unprecedented wave of innovation.

The arrival of Bitcoin and the technology behind it, often called blockchain, is sure to hasten that change — and that will in turn generate a tsunami of adaptation across a variety of industries ranging from energy to intellectual property to government affairs and international trade.

Blockchain technology has taken on many different forms, attracting attention from the financial industry, insurance firms, regulatory bodies and many more. It’s potential to disrupt bureaucratic systems in new and interesting ways is tempting both large organisations and governments. One specific aspect is the smart contract.

Blockchain technology – Smart Contracts

The Regulatory infrastructures could be circumvented by smart contract technology, like bitcoin, and this would reduce costs for financial transactions. An important feature of a smart contract is the ability to reduce risk through non-discriminatory execution. The lack of a central counterparty agent can enable such contracts to service markets with greater efficiency.

Smart contracts are computer protocols that are able to facilitate, verify, or enforce the negotiation or performance of a contract. They are able to replicate logic that upholds contractual clauses, and should be partially/fully self-executing, and/or self-enforcing.

The aim of a smart contract is to achieve heightened security, as they are touted as being tamper proof, and minimise human error.

Using smart contracts in financial deals

Financial transactions are one potential way to use smart contracts. Smart derivatives contracts could be coded so that payment, clearing, and settlement occur automatically in a decentralized manner, without the need for a third-party intermediary, such as an exchange or clearinghouse.

For example, a smart derivatives contract could be pre-programed with all contractual terms (i.e., quality, quantity, delivery). Margin could be automatically transferred upon margin calls and the contract could terminate itself in the event of a counterparty default. The blockchain would perform the recordkeeping, auditing, and custodial functions traditionally performed by intermediaries, resulting in transactional cost savings for the contracting parties.

With financial technology startups continuing to develop smart contracts for financial transactions, securities and derivatives regulators will ultimately need to formulate an approach for regulating their use. Several regulators have already signaled their intention to examine the use of blockchain technology in the financial sector.

Smart contracts are potentially attractive to regulators, since they increase transaction security and reduce the risk of manipulation.

Blockchain-based smart contract benefits

For a wide range of potential applications, blockchain-based smart contracts could offer a number of benefits:

• Speed and real-time updates. Because smart contracts use software code to automate tasks that are typically accomplished through manual means, they can increase the speed of a wide variety of business processes.
• Automated transactions are not only faster but less prone to manual error.
• Lower execution risk. The decentralized process of execution virtually eliminates the risk of manipulation, nonperformance, or errors, since execution is managed automatically by the network rather than an individual party.
• Fewer intermediaries. Smart contracts can reduce or eliminate reliance on third-party intermediaries that provide “trust” services such as escrow between counterparties.
• Lower cost. New processes enabled by smart contracts require less human intervention and fewer intermediaries and will therefore reduce costs.

According to Jerry Cuomo, vice president for blockchain technologies at IBM, smart contracts will be useful across industries, from financial services to logistics (incorporating Internet of Things sensors) to the insurance industry.

The impact of Blockchain applications in the areas of Financial Inclusion cannot be underestimated in Africa. Countries such as Zimbabwe, Kenya, RSA have already adopted innovative blockchain solutions. If you are keen to learn more about blockchain technology, Anglo African team will be pleased to provide you further details on blockchain technology, contact us on 2331636 or by e-mail at contact@infosystems.mu